Misrepresenting Household Size & Income

Misrepresenting Household Size & Income

It’s September in Nebraska.  Labor Day is over.  The kids are back in school. Footballs are in the air, especially in Nebraska where our beloved Cornhusker football team has abandoned tradition and is throwing the football everywhere. Yep, I hate it. I so miss power football.

Back to the topic at hand.

The authors of the Bankruptcy Reform Act of 2005 believed that debtors frequently failed to report all their available income, so to address this issue the new law requires a debtor to disclose all “household income.”

Household income is more than just the wages of the debtor.  It includes the wages of the debtor’s spouse and any other source of regular income.

Bankruptcy attorneys are charged with a special duty to investigate the income of a debtor and to report all income received in the prior six months.  Attorneys must certify that they performed a “due diligence” inquiry of the debtor’s past and present income.

How does an attorney perform investigate household income?

We start by gathering six months of paycheck stubs.  We also collect six months of bank statements and determine the source of each deposit.  We also review two years of tax returns and create an inventory of assets.

If a debtor is self-employed, we inspect the business records.  Bank accounts. Balance Sheets. Inventory. Tax returns.

Household income received in the prior six months is a key factor in every consumer bankruptcy case.

If income exceeds certain levels, the doors of Chapter 7 close.  Rather, a debtor is left to file a 5-year Chapter 13 payment plan. If income is below median income, a chapter 13 plan may be completed in 3 years.

Two key factors must be measured:

  • Median Income: Debtors whose household income exceeds the median income level for a particular household size will find it difficult to file Chapter 7.  What’s more, those with above-median income levels will be required to pay back a percentage of their debt based on a mathematical formula call the Means Test.
  • Household Size: Median income is based on household size. The larger the household, the higher the debtor’s income may be to qualify for chapter 7.

Correctly stating a debtor’s household size and income is critical.  This is the gateway to Chapter 7 and shorter 3-year chapter 13 plans.

So, this is the game.  Get it? To be an effective bankruptcy attorney you must manipulate the debtor’s income and household size to qualify for chapter 7.  By not including some income and by including more people in the household, an attorney can qualify debtors for chapter 7 or short-term chapter 13 payments.

Calculating household size and income is absolutely critical.  It is the foundation block of every case.

And because these measurements are the doors through which all debtors must pass, there is a great temptation by debtors and their attorneys to understate income and overstate household size.

This is the topic I would like to explore in the next several posts.  How do attorneys cleverly understate a debtor’s income and get away with it? How can debtors exaggerate their household size to fall below median income limits?


Image courtesy of Flicker and Kiley

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Amer Mustafa

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